Equilibrium Price Dispersion with Sequential Search

We propose a novel theory of equilibrium price dispersion in product markets with search frictions. As in Diamond (1971), buyers search for sellers sequentially. In contrast to Diamond (1971), buyers do not meet all sellers with the same probability. Specifically, a fraction of the buyers’ meetings leads to one particular large seller, while the remaining fraction of the meetings leads to one of a continuum of small sellers. We prove that the unique equilibrium of this model is such that sellers post a non-degenerate distribution of prices and buyers capture a positive fraction of the gains from trade. The fraction of gains from trade accruing to the buyers is hump-shaped with respect to the market power of the large seller. However, for any degree of market power of the large seller, the fraction of gains from trade accruing to the buyers converges to one when search frictions vanish, and converges to zero when search frictions become arbitrarily large.